Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Rambus Exploits a Broken System -- Again

It's Rambus vs. the world, and the wrong side is winning.

The legal attack eagles of Rambus(Nasdaq: RMBS) are at it again. On the heels of a juicy new license contract with memory maker Elpida, the memory technologist has convinced U.S. authorities to investigate a really, really big patent infringement case.

Rambus filed this action at the start of December in a 214-page filing, plus 536 digital files containing exhibits. I don't blame the International Trade Commission for taking some time to think about tackling this case, especially that close to the holidays.

The battlegroundAt the heart of this enormous filing lie six chipmakers, whose products allegedly use Rambus' patented technologies without a proper license. We're talking about big names with far-reaching connections in the IT industry, including American chip wranglers Broadcom(Nasdaq: BRCM), NVIDIA(Nasdaq: NVDA), Freescale, and LSI(NYSE: LSI). Rambus wants to stop all of them from selling infringing products in America until the ITC has banged its gavel and imposed proper punishment.

That has ripple effects across the computing industry. In a joint comment to the ITC, the accused don't even try very hard to dispute the infringement itself, but instead argue that blocking their business would cause considerable harm to the American economy:

The sheer scope and variety of accused articles makes it likely, if not inevitable, that any exclusion order excluding all accused products found to be infringing would have a material impact on public health and safety. ... Rambus' patenting and licensing actions actually frustrate, rather than advance, the competitive conditions in the economy.

Indeed. Along with the semiconductor companies at the heart of the conflict, Rambus also seeks to block 18 of their customers from selling devices with the errant circuits inside. For example, the proposed action would cause severe damage to Cisco Systems(Nasdaq: CSCO) and Hewlett-Packard(NYSE: HPQ), both of whom use Broadcom and LSI chips in their networking equipment and servers.

I can't imagine the commission wanting to do that to such a distinguished, deep-pocketed, and lobby-happy bunch of true-blue American businesses. The body has promised to set a target date for completing the investigation within 45 days of starting it.

Drawing the lineOn the one hand, we have what looks like a legitimate patentholder seeking to protect its intellectual property. On the other hand, the actions taken to do so come with serious and undesirable side effects. And the whole mess is a product of a badly broken intellectual property framework that was designed for Pony Express communications and buggy whip designs centuries ago, then never fully updated to reflect the digital ages.

The defendants argue that Rambus bases its business model on legal threats, including the purchase of patents for the sole purpose of launching lawsuits. In some cases, it's impossible to follow commonly accepted business standards without stepping on Rambus' legal toes.

Some would simply call this a smart business model -- legal settlements have covered the entire cost of Rambus' R&D efforts over the last 12 months. So the patent system is flawed; wouldn't Rambus be stupid not to exploit those imperfections?

But I'm solidly in the corner of the defendants here, and of every target of patent trolling. It's one thing to actively invent and develop bleeding-edge technologies and then make a living off those patents, as Universal Display(Nasdaq: PANL) does with OLED licenses.

When Universal Display launches a press release, it's typically because the company wants to highlight a technology improvement, another government contract, or -- yes, indeed -- another renewed or brand-new licensing agreement. I suppose litigation is part of the company's arsenal, but it's a weapon rarely wielded.

By contrast, Rambus is as likely to announce another lawsuit or trumpet the outcome of one as it is to talk about technology. In the company's earnings calls, General Counsel Tom Lavelle and semiconductor general manager/licensing chief Sharon Holt are as important to the proceedings as CEO Harold Hughes and CFO Satish Rishi. Universal Display doesn't even bring its licensing and litigation people to its calls.

The final conflictRambus will probably get a settlement or two out of this action when all is said and done, along with a handful of license agreements that are nothing but profit margin for the company. Well-played under the prevailing rulebook, I suppose.

But it's a victory for a monstrous business model that has no business being in business. Isn't it time we overhauled the legal framework? Industry standards like low-level memory interfaces shouldn't be bought and sold like heads of cattle, earmarked, and firebranded for the protection of a middleman rancher that didn't do much to raise the animals in the first place.

OK, I'll get off my soapbox now. Where do you stand in this ugly intellectual property conflict? Spill your beans in the comments below.